Big Tobacco after biggest jury award

Industry's survival may pivot on outcome of appeal of a $149 billion damage award.

July 17, 2000

By Ron SchererStaff writer of The Christian Science Monitor

NEW YORK

It is a number that has captured the attention of the nation - $145 billion.

It's big enough that it sounds like a tax bill being debated in Congress or some new Pentagon project. But, in fact, it is the amount that a Florida jury has ruled that tobacco companies have to pay for damage caused to smokers in the state - and it's raising a fundamental question: Can Big Tobacco survive it?

To some, the award is so start-ling - the equivalent of the gross domestic product of Portugal - that the industry will never be the same again. Others say it's big enough that the companies will never have to pay.

However it ends up, industry observers say the Florida decision is a good example of how dramatically society has changed the way it views cigarettes. They may be a legal product - but the producers have to be responsible for the damage they have caused.

"This is a trend that is reasonably new, and this case will accelerate it," says Clifford Douglas, an outside co-counsel in the trial.

If the Florida judgment survives the appeals process, it could have wide-ranging implications for smokers. They're likely to have to pay a lot more for each pack of cigarettes. Raising prices is almost the only way the companies, which remain profitable, can afford these huge damage awards.

At the same time, the companies may be forced to change their marketing techniques to convince future juries that they have changed their ways. Already, they have been forced to admit in court that their product is harmful and addictive. Will they be forced to add these words to the outside of the cigarette pack?

The Florida mega-award comes at a sensitive time for the industry in Washington. Congress is poised next year to review the issue of Food and Drug Administration oversight of tobacco. The companies are also gearing up to fight a massive lawsuit by the Department of Justice over whether they should be forced to reimburse the government for smoking-related Medicare costs.

As part of its strategy, the industry is allying itself with Republican efforts to reform the courts to preempt additional liability litigation. Yet it may also be forced to adopt a more conciliatory tone with Congress.

"They will have to look to Congress and this time bring something acceptable to the public-health community," says Richard Daynard, a professor at Northeastern University and head of the Tobacco Liability Project.

Additional impetus to seek a rapprochement with Capitol Hill is the prospect of huge payouts ahead. Aside from whatever punitive damages the industry ends up paying in the so-called Engle case in Florida, it still owes compensatory damages to 500,000 to 700,000 Floridians. So far, the court has only heard three claims in this phase and awarded $12 million. If future payouts averaged $4 million each, it could result in potential liability of $2 trillion - just for Florida.

In January, the industry faces another class-action suit in Louisiana. The plaintiffs are asking the tobacco industry to pay for the medical monitoring of 1 million smokers. It could cost the industry $10,000 per smoker.

As news of the huge judgments spread, so do the number of potential plaintiffs. After appearing on TV to talk about the Engle decision, Joe Cherner of Smokefree Educational Services Inc. started getting e-mails from smokers looking for legal counsel. Despite the Florida verdict Friday, it's still not easy winning claims against the industry. "It's no slam dunk, but it's no longer mission impossible," says Edward Sweda of the Tobacco Liability Project.

The tobacco industry says it's not worried about losing the Engle case: It expects the entire action to be overturned. "As the case now moves to the appellate courts, Brown &amp; Williamson is 100 percent confident that the higher courts will reverse the Engle decisions, given the numerous errors committed during the trial and the significant constitutional issues involved in this case," says Gordon Smith, the company's lead lawyer. The jury assessed B&amp;W $17.6 billion in damages.

Among the areas B&amp;W expects to appeal:

*Certification of the case as a class action was wrong because tobacco claims turn on individual issues.

*The trial judge, Robert Kaye, was not impartial because, as an ex-smoker with a medical condition, he is a member of the plaintiff's class. In his rulings, he excluded many smokers from serving as jurors, since they too would be potential members of the class.

*The judge allowed the plaintiffs to argue that cigarettes should not be legal products.

At this point Wall Street analysts think the industry has good grounds to win on appeal. The stocks of Philip Morris Cos., RJ Reynolds Tobacco Holdings Inc., Loews Corp., and Vector Group did not drop much on Friday after the decision was announced.

Even antitobacco advocates agree it's likely the damage award will be reduced on appeal, which could take two to three years. Awards in other tobacco liability cases have been reduced recently. "Even if it is lowered, it's still a huge amount of money," says Mr. Sweda.

Whether the industry ends up in bankruptcy may depend on the next phase of the case - and the size of the bond it has to post during appeal. Last year, the Florida legislature passed legislation limiting bonds to $100 million per company. But questions exist about whether it can be retroactively used in the Engle case. If the plaintiff's attorney, Stanley Rosenblatt, challenges the legislation and wins, the industry would be forced to post $145 billion, plus 20 percent.